Ch. 5 - The Stock Market

Private equity funds generally have:

-a high-water-mark provision -a "clawback" provision

Tombstones

-announcements placed by underwriters in newspapers -beginning of selling shares

Private equity funds and hedge funds are 2 two types of investment companies. Both:

-are set up as limited partnership -pool money from investors -2/20 fee structure -have built-in constraints to prevent managers from taking excessive compensation

LBO market activity levels depend on credit markets

-around 2005, the LBO market was quite active -activity in the LBO market came to a standstill after the crash of 2008

Steps of an IPO (and SEO):

-company appoints an investment banking firm to arrange financing -investment banker designs the stock issue and arranges for fixed commitment or best effort underwriting -company prepares a prospectus and submits it to the SEC for approval. Investment banker circulates preliminary prospectus (red herring)

Reasons middle market companies seek more capital:

-expansion beyond their existing region -founder wants to "cash out"

Venture capital firms pool funds from various sources, like:

-individuals -pension funds -insurance companies -large corporations -university endowments

IPO

-initial public offering -an IPO occurs when a company offers stock for sale to the public for the first time

In 2006, all of this changed when the NYSE went public:

-instead of purchasing seats, exchange members purchasing trading licenses: limited to 1500 members -having a license entitles the holder to buy and sell securities on the floor of the exchange

The cost of going private:

-is often high -a manager or investor who wants to take a company private probably needs to borrow a significant amount of money -taking a company private is called a leveraged boyout (LBO)

The secondary market:

-is the market where investors trade previously issues securities -an investor can trade directly with others -an investor can trade indirectly through a broker who arranges transactions for others -an investor can trade directly with a dealer who buys and sells securities from inventory

Specialists

-posted bid prices and ask prices for each security assigned to them -were obligated to make and maintain a fair, orderly market -specialists stood ready to buy at bid prices and sell at ask prices when outside sell and buy order flows were unequal

SEO

-seasoned equity offering -if a company already has public shares, an SEO occurs when a company raises more equity

If a start-up succeeds:

-the big payoff frequently comes when the company is sold to another company or goes public -either way, investment bankers are often involved in the process

Bid price

-the price dealers pay investors -the price investors receive from dealers

Ask price

-the price dealers receive from investors -the price investors pay dealers

To limit the risk associated with venture capitalist opportunities:

-venture capitalists generally provide financing in stages -venture capitalists actively help run the company

Historically, the NYSE had 1366 exchange members. These members:

-were said to own "seats" on the exchange -collectively owned the exchange, although professionals managed the exchange -regularly bought and sold seats -seat holders could buy and sell securities on the exchange floor without paying commissions

"Taking the company private"

a company (or someone else) purchases all the shares of the company held by the public at large

The goal of the secondary market

is to match investors wishing to buy stocks with investors wishing to sell stocks

Common stock trading typically occurs

on either an organized stock exchange or a trading network

Venture capital (VC)

start-ups with no assets, just an idea run by fledgling entrepreneurs with no track record

At each stage of financing with venture capitalism:

the value of the founder's stake grows and the probability of success rises

Private equity

used in the rapidly growing area f equity financing for nonpublic companies